Payment cards allow cardholders to make financial transactions without exchanging cash. A payment card is typically tied to an account, with an associated spending limit that is secured either by cardholder funds or by credit from a card-issuing financial institution.
In a typical payment card transaction, a cardholder presents the payment card information to a merchant (via a card reader or online), who then initiates a transaction authorization via the merchant's financial institution processor (i.e. acquirer processor) to the cardholder's financial institution processor (i.e. issuer processor).
The issuer processor conducts a series of checks that may include one or more of the following: validation of the transaction request format, validation of requesting merchant, fraud checks, compliance of the payment card with pre-defined card usage rules, and availability of funds in the cardholder's account. The examples above are neither comprehensive nor limiting. If all the checks pass satisfactorily, the issuer processor authorizes the transaction request. The transaction authorization allows the exchange of goods/services between the merchant and the cardholder to proceed, with the reconciliation and actual transfer of funds happening either concurrently, or at a later time. Card networks allow different acquirer and issuer processors to communicate with each other in “open loop” communications, while the acquirer and issuer processor either are typically the same or tied to each other via peer relationships in “closed loop” communications.